Organizations are finding it increasingly difficult to compete in the international marketplace as markets become more global. The increasing competition in many areas of manufacturing, commerce, services, and other forms of business leads to sinking market prices, which in turn causes profit margins to decrease. Meanwhile, rapidly changing technologies lead to greater automation, which increases efficiency but also requires the allocation of funds for the expenses associated with new equipment. When deciding whether to invest in expensive equipment, organizations are forced to weigh the associated long-term costs and benefits.
At the same time, there is also great pressure for organizations to make profits in the short term. Investors are increasingly focusing on short-term results, and product life cycles are generally becoming shorter. Expenditures that create increased overhead need to be understood to justify the impact in the short term.
Thus, organizations have a growing interest in clearly understanding their overhead structure. Cost accounting approaches, such as activity based costing, are often used for monitoring overhead. Detailed analysis and overviews are available for the direct costs of production, such as wages, materials, machine hours, etc. However, indirect costs of manufacturing, sales, and administration are traditionally more difficult to measure, and cost controlling is even more difficult to implement.
In traditional cost accounting, an important tool is the structuring of costs based on organizational and responsibility considerations. This allows identification of where costs occur within an organization. Product cost planning has also traditionally focused almost exclusively on direct production costs. More sophisticated accounting techniques, such as activity based costing, may assist in explaining why those costs came to be what they are, or how they can be changed beneficially. They may also be used to assign indirect costs to the end products, which becomes more important when overhead costs are high. Organizations that are careless with the computation of such costs are in greater danger of costing themselves out of the market. Today, it is even more important that management base its decisions on accurate and current costing information, so that the best strategies for investments, products, sales, distribution, and services may be implemented.
However, these more sophisticated accounting techniques are difficult to implement using the tools available today. Presently, cost allocation is often only value-based, because a simple way to find the appropriate cost drivers has heretofore been unknown. In other implementations, assignments could only use quantities based on inadequate information, such as the amount of direct labor from the routing. In both cases, the results are not sufficient. Simple, fast, and accurate determination of quantity flows is a major challenge facing an adequate cost assignment. Therefore, it would be advantageous to have an effective method, that is quantity or resource oriented, for tracking costs to which accounting techniques are applied.